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    Market Failures Continue to Plague Transportation Systems, Depressing Demand for Automated Transit Systems

    August 15th, 2018


    By Christopher Juniper
    9 August 2018

    Governments continue to flail about wrestling with serious market failures associated with transportation – now including New York City’s moratorium on new for-hire vehicle licenses (e.g. Uber, Lyft) which had grown about 60% since 2015 to about 100,000. New licenses will only be issued to drivers providing wheelchair accessible vehicles while the City studies how to successfully regulate the market for 12 months.

    The market failures that dog transportation systems include these four with the most impacts:
    (1) artificially low energy prices (compared to prices that “tell the truth” by including sustainability-related negative externalities);

    (2) absurdly low vehicle registration and use fees (compared to public costs of provided the infrastructure the vehicles need);

    (3) drivers using their presumed marginal operating costs to guide whether to use personal vehicles or not – i.e. thinking that extra mile today costs just a few pennies (e.g. the price of fuel) instead of the real approximately $1/mile costs ; and

    (4) large subsidies for mass transit systems such that customers pay only a small fraction of the actual costs of providing services.

    These market failures combine to suppress the demand and use of highly fuel- and labor efficient automated transit systems. Just as solar and wind energy systems would have been the preferred economic choice decades ago if fossil fuels had to pay their full cost, tax-subsidized mass transit systems, without the tax subsidies, would have been dismantled years ago in favor of driverless automated transit systems that are possibly 5 times less costly per rider (i.e. don’t need the tax subsidies to be financially desirable).

    The sooner governments squarely face these failures and bring more market rationality to people and businesses’ transportation choices, the faster sustainable transportation systems can get built and become the mode of choice for the majority of users.

    The particular market failures now being addressed by New York City include all of the above, plus the swamping of the streets with the new ride providing services that were, for some reason, not limited in number as taxi licenses (medallions) have been. So taxi and ride-providing drivers were set up to be in a competitive economic death struggle that was preventing many from earning a living wage, and tying up streets with congestion. The city’s response includes regulating a minimum hourly wage after operating expenses.

    Uber’s business model has included providing massive subsidies to its drivers in order to out-compete taxis on a cost basis , which can be seen as another market failure – though a commonly used one when a new company aims to achieve market share (and power) on the back of investors. In other words, rides were being offered to riders below cost, artificially and unsustainably over time stimulating use of individual vehicles instead of alternatives. Thus, the artificially increased congestion.

    Governments, including transit agencies, would do well to be reducing market failures and attendant regulatory schemes instead of continue to get “wrapped around the axle” of them as New York City is having to do. Let people pay the full price (including externalities) and see how quickly automated transit systems become the strongly preferred choice of consumers, and budget-beleaguered government officials.



    Emma G. Fitzsimmons, “New York City Votes to Cap Uber and Lyft in a Crackdown,” The New York Times, 8 August 2018, at:

    The “True Cost of Driving” calculator for Santa Cruz County, California estimates the per mile cost of operating a personal vehicle at $0.94 per mile (including travel time and accidents). See: The American Automobile Association (AAA) estimated the cost of driving 15,000 miles in one year in a new vehicle to be ~$0.57 cents per mile in 2017 – see:

    See, for example, Reuters, “Uber Reportedly Lost More Than $1 Billion Over the First Half of 2016,” 25 August 2016, at: And Heather Somerville, Reuters, “True price of an Uber ride in question as investors assess firm’s value,” 23 August 2017, at: